(1 of )Susan Thompson is the controller of Pisenti & Brinker, LLP, which rents a high quality office space in the Fountaingrove area owned by Basin Street Properties.

Sonoma County has many big buildings, few big businesses, creating a glut of office space that experts say may last awhile

ROBERT DIGITALE

THE PRESS DEMOCRAT | June 13, 2010

Sonoma County has plenty of big office buildings, built to suit the high-tech companies that once filled them.

But given today's economic climate, in which 85 percent of the county's businesses have 15 or fewer employees, finding tenants for them has become increasingly difficult.

Nearly a quarter of the county's office space is now vacant, a condition Moody's Economy.com recently described as "an enormous glut." And leasing experts predict that demand will remain sluggish for the next few years.

"It's bouncing along the bottom, which is really what you're saying about the economy overall," says Al Coppin, president of Keegan & Coppin, the North Bay's largest commercial real estate company.

His firm's vacancy rate estimates vary by location, from about 16 percent in Santa Rosa, Windsor and Healdsburg, to 40 percent in Rohnert Park and Petaluma.

Coppin said the market won't change much until businesses start hiring more workers and then seek new space to house them. Even then, much of the space now vacant will be too big to attract the new tenants.

"You have a building that doesn't work any more for the market," said Matt White, president and CEO of Reno's Basin Street Properties, a commercial real estate owner and developer in Sonoma County.

The county's office vacancy rate ended the first quarter at 24 percent, according to Keegan & Coppin. The rate has risen almost every quarter since at least the summer of 2007, when it stood at nearly 17 percent.

Forty percent of Petaluma's 3.2 million-square-foot supply -- 1.2 million square feet -- were vacant at the end of March.

By comparison, Sonoma County has 13.8 million square feet of office space, 3.4 million square feet of it vacant.

Petaluma's inventory includes huge buildings built in the city's Telecom Valley days when tech companies filled business parks with hundreds of office workers and research and development staffers.

For such space today, "we've got a lot of supply and very little demand," said Josh Lindberg, an associate with Cushman & Wakefield, a commercial real estate brokerage in San Rafael.

The picture looked considerably different in 2005 when the Chicago-based Equity Office Properties Trust became Sonoma County's largest commercial landlord. That year, the company paid Basin Street $263 million for 1.43 million square feet of North Bay office properties -- a price amounting to nearly $184 per square foot.

The purchase gave Equity Office a 33 percent share of Class A office space in the county and a 40-percent share in Marin County.

Today, a significant amount of that space remains empty. Five Equity Office buildings in Santa Rosa's Parkpoint business park are slated to be sold at a foreclosure auction this month in an effort to recover a debt pegged at $7.1 million.

Representatives for Equity Office were unavailable for comment.

Over the decades, Sonoma County has had employers with hundreds of employees in office parks and campus settings. They include Agilent Technologies, JDSU, State Farm Insurance and Medtronic.

Nonetheless, "we are a county of small businesses," said Ben Stone, executive director of the county's Economic Development board.

Prospects appear brighter for more modern Class A office space. Basin Street, which last summer moved its headquarters from Petaluma to Reno, completed a three-story, 63,000-square-foot office building last year on Round Barn Boulevard in Santa Rosa's high-end hillside Fountaingrove commercial office area.

The building is now 40 percent occupied, including 6,000 square feet on the top floor that accounting firm Pisenti & Brinker moved into in December.

While not disclosing details of the lease, Pisenti & Brinker controller Susan Thompson said Basin Street provided a "very competitive" rate and allowed the accounting firm to make sure the completed space was "exactly what we wanted."

"We've got nice new digs that we're really enjoying," Thompson said.

White said more businesses have moved into his company's newer Petaluma properties in recent months. Even so, he said, business owners are "very, very tentative coming out of this recession."

For landlords, White predicts that "it's going to be another couple of years before we're really feeling good about growth."

When demand picks up for Class A office space, White, Coppin and others predict that it will be especially strong in such areas as Fountaingrove and Santa Rosa's downtown. Those locations are deemed premium and typically have had lower vacancy rates.

"I think tenants who can make their deals now better do it because the dynamics are going to change in markets like Santa Rosa," said Hugh Futrell, a commercial and residential developer who is negotiating with the city to renovate the downtown's former AT&T building.

"Once we get job generation again, the office market will tighten up very, very rapidly and the opportunity for deals will disappear."

For now, the deals remain available. Coppin and Dave Peterson, a Keegan & Coppin partner, said some businesses have been able to obtain rates that were last seen at least 15 years ago. Peterson said back then Class A buildings could be leased for $1.85 to $2 a square foot. Today some landlords have agreed to rates less than $1.65 a square foot.

Smart landlords are doing all they can today to hang on to existing clients, said Jeff Traynor, a senior sales representative with Cornish & Carey commercial real estate brokerage in Larkspur.

"It's very difficult to get new tenants in," he said.

In Petaluma, one former office property recently was converted to warehouse and retail space.

Organic egg producer Petaluma Farms paid $1.16 million for a freeway-frontage building that formerly housed Creative Leisure, said Traynor, who represented Petaluma Farms. The sales price amounted to about $75 per square foot.

Even so, Traynor doubted that many other office properties would work for warehouse conversions.

Instead, he and other agents and brokers said landlords of huge office buildings eventually must pay to divide up the space in ways that will attract smaller tenants.

Said Peterson of Keegan & Coppin, "A lot of people are going to be sitting with empty buildings until they come to that conclusion."

You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com.